Mortgage rates moved up again this week as leading indicators of economic activity point to a much more resilient economy than previously thought. Business surveys for both the manufacturing and the services sectors showed an uptick in activity in January. The uptick in home builder sentiment also bodes well for new home construction, which historically tends to predict an increase in economic activity. Along with these indicators of additional spending in the economy comes the risk that inflation will be difficult to keep around the Federal Reserve’s 2 percent target. 

However, the portion of inflation driven by rents is continuing to shrink. Market rent data and the latest release of the producer price index point to further disinflation ahead. This week’s release of the personal consumption expenditures price index – the Fed’s preferred inflation gauge – will likely cause large swings in mortgage rates. All of this means that mortgage rates are likely to bounce around within the current range until the fog clears.

Mortgage rates bottomed in the last week of December and have been rising since. Market participants will be looking to the economic data for signs that inflation can be sustained at the Fed’s two percent target.”